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Ratings agency adds nails to Slovak coffin

The world's most respected rating agency, Standard and Poor's, finally joined other major rating institutions in lowering Slovakia's credit ratings to speculative levels from the lowest investment grade. The move, announced in New York on September 17, was blasted by Slovak government officials, who said the agency had not done its homework on the country.Sergej Kozlík, Deputy Prime Minister in charge of economy, rejected the rating downgrades and accused rating agencies of failing to carry out deeper research of Slovakia's economic situation before taking decisions."I consider the conclusions of rating agencies to a large extent shallow, not deeply thought out and not reflecting a deep knowledge of the concrete situation in Slovakia," Kozlik told a banking conference at the Finex financial fair in Banská Bystrica.

The world's most respected rating agency, Standard and Poor's, finally joined other major rating institutions in lowering Slovakia's credit ratings to speculative levels from the lowest investment grade. The move, announced in New York on September 17, was blasted by Slovak government officials, who said the agency had not done its homework on the country.

Sergej Kozlík, Deputy Prime Minister in charge of economy, rejected the rating downgrades and accused rating agencies of failing to carry out deeper research of Slovakia's economic situation before taking decisions.

"I consider the conclusions of rating agencies to a large extent shallow, not deeply thought out and not reflecting a deep knowledge of the concrete situation in Slovakia," Kozlik told a banking conference at the Finex financial fair in Banská Bystrica.

Standard and Poor's cut Slovakia's senior unsecured rating to BB plus from BBB minus, and lowered the country's short-term foreign currency rating to B from A

Credit ratings provide a guide for investors on the credibility of potential borrowers around the world. A rating downgrade usually means that the borrower will find it more difficult, or more expensive, to obtain funds through loans or bond issues.

Standard and Poor's said the main reasons behind the Slovak downgrade were the country's macroeconomic policies, which continued to be inconsistent, as well as the government's expansive fiscal policy, the pegged exchange rate of the crown and the central bank's tight monetary policy. This last factor, the agency said, has caused a sharp increase in general government and current account deficits and a resultant jump in foreign borrowing.

The Slovak state budget deficit rose to 8.6 billion Sk ($246 million) in fiscal terms (not including payments of state debt principal) at the end of August. The budget plan originally counted on a maximum 8.0 billion Sk deficit for the whole year.

According to the latest information, the current account deficit totalled 38.2 billion Sk ($1.1 billion) in the first half of this year, around 10% of the gross domestic product. The central bank considers 3% of GDP to be a safe level of deficit in the current account balance.

Standard and Poor's was the last of the world's three most respected rating agencies to cut Slovakia's rating this year.

The first was Moody's Investor Service, which in March downgraded the Slovak Republic's ceiling for foreign currency bonds and notes to Ba/NP and the country ceiling for foreign currency bank deposits to Ba2. In May, Thomson BankWatch, a Thomson financial services company, cut Slovakia's sovereign risk rating to BB from BB+.

"Unfortunately, I do not notice [that the agencies have] a significant interest in knowing more deeply what the real situation is," said Kozlík in response to the concerted rating agency revisions.

Kozlik explained that some of the main reasons cited by rating agencies, such as rising foreign debt and a growing foreign trade deficit, had been caused by imports of technology, which could help stabilise the economy in the future.

The central bank responded calmly to the rating cuts. Spokesman Ján Onda said that neither the bank nor the government planned any new issues on international financial markets, so the lower ratings should not directly affect Slovakia's sovereign borrowing position. However, Onda did agree that the rating downgrade could worsen the situation for private corporates in their attempts to tap foreign financial markets.

ING Barings analyst Martin Barto said he did not expect a significant outflow of foreign funds from Slovakia after the rating cut because of the low level of foreign investment in the country. But he said the lower rating meant that Slovakia's access to foreign loans would be narrowed.

Standard and Poor's said its outlook for Slovakia's rating remained negative. The agency said that a further downgrade was possible unless there was an improvement in the political sphere and on the level of economic management. Continuing problems in these areas, the agency warned, could lead to a further rise in external liquidity pressure.

According to the rating agency, the new government formed after elections on September 25 and 26 could find it difficult to approve quick changes to fiscal policies. Macroeconomic analysts agreed with Standard and Poor's, saying that they also did not expect a fast improvement in the most troubled area of Slovakia's economy - foreign trade.

"Any new government will need to deal with negative tendencies that have been worsening Slovakia's external position for many years," said one London-based analyst at an international investment bank. "This would require tough measures to cut government spending and also cutting household spending, and such steps are always very painful. It is still a big question whether a new government will be quick in implementing such measures, but I would say we will wait some time to see improvement."

Reasons behind Standard and Poor's rating cuts

* The significant increase in Slovakia's overall and government external indebtness due to growing internal and external imbalances.* Lingering political strife, which poses significant medium term challenges and risk. * Powerful vested interests and widespread political patronage that constrain political reforms and slow Slovakia's integration. * The challenges of industrial restructuring and changes in corporate governance needed to reduce the direct and indirect influence of the state. * A weak banking system that, while beginning to benefit from improved supervision and regulation, continues to have poor and deteriorating assets. Slovakia's banking system has been crippled by interest rate volatility, further weakening corporate performance, and by a lack of political will to legislate overdue tax changes that would relieve banks from paying taxes on interest accrued, but uncollected.An expected economic slowdown in 1999 and beyond will cause further deterioration in the banks' portfolios.

24. Sep 1998 at 0:00
| Jakub Malý

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